If the MPC is 3/5 then the multiplier is
A)4, so a $100 increase in government spending increases aggregate demand by $400.
B)1.5, so a $100 increase in government spending increases output by $150.
C)2.5, so a $100 increase in government spending increases aggregate demand by $250.
D)1.67, so a $100 increase in government spending increases output by $166.67.

Question

Quizplus · Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 3/5, the multiplier is 1/(1-3/5) = 1/(2/5) = 2.5. Therefore, a $100 increase in government spending increases aggregate demand by $250.

If the MPC Is 3/5 Then the Multiplier Is